D0O39a Entrepreneurship & New Business Development PDF

Inhoudsopgave {#inhoudsopgave.TOCHeading} ============= [Chapter 1: Introduction to entrepreneurship 4](#chapter-1-introduction-to-entrepreneurship) [Chapter 2: Recognizing opportunities and generating ideas 4](#chapter-2-recognizing-opportunities-and-generating-ideas) [Chapter 3: feasibility ana...

Inhoudsopgave {#inhoudsopgave.TOCHeading} ============= [Chapter 1: Introduction to entrepreneurship 4](#chapter-1-introduction-to-entrepreneurship) [Chapter 2: Recognizing opportunities and generating ideas 4](#chapter-2-recognizing-opportunities-and-generating-ideas) [Chapter 3: feasibility analysis 5](#chapter-3-feasibility-analysis) [Product/ service feasibility 5](#product-service-feasibility) [Product/ service desirability 6](#product-service-desirability) [Product/ service demand 6](#product-service-demand) [Industry/ target market feasibility analysis 6](#industry-target-market-feasibility-analysis) [Organizational feasibility analysis 6](#organizational-feasibility-analysis) [Financial feasibility analysis 7](#financial-feasibility-analysis) [Chapter 4: writing a business plan 7](#chapter-4-writing-a-business-plan) [Guidelines for writing a business plan 7](#guidelines-for-writing-a-business-plan) [Types of business plans 8](#types-of-business-plans) [Business plan outline 8](#business-plan-outline) [Section 1: executive summary 8](#section-1-executive-summary) [Section 2: Company description 8](#section-2-company-description) [Section 3: Industry analysis 9](#section-3-industry-analysis) [Section 4: Target market analysis 9](#section-4-target-market-analysis) [Section 5: Marketing plan 9](#section-5-marketing-plan) [Section 6: Management team and company structure 9](#section-6-management-team-and-company-structure) [Section 7: operations plan 9](#section-7-operations-plan) [Section 8: product (or service) development plan 10](#section-8-product-or-service-development-plan) [Section 9: Financial projections 10](#section-9-financial-projections) [Chapter 5 -- Part I: Analyzing the industry 10](#chapter-5-part-i-analyzing-the-industry) [What is an industry analysis 10](#what-is-an-industry-analysis) [Why do an industry analysis 10](#why-do-an-industry-analysis) [Things to include 11](#things-to-include) [Industry definition 11](#industry-definition) [Industry size, growth rate and sales projections 11](#industry-size-growth-rate-and-sales-projections) [Industry characteristics 11](#industry-characteristics) [Industry trends 12](#industry-trends) [Industry long-term prospects 12](#industry-long-term-prospects) [Chapter 5 -- Part II: Target market analysis 13](#chapter-5-part-ii-target-market-analysis) [Why do a target market analysis? 13](#why-do-a-target-market-analysis) [Things to include 13](#things-to-include-1) [Industry segmentation 13](#industry-segmentation) [Target market selection 14](#target-market-selection) [Target market size 14](#target-market-size) [Target market trends 14](#target-market-trends) [Competitor analysis 14](#competitor-analysis) [Estimate of annual sales and market share 15](#estimate-of-annual-sales-and-market-share) [Chapter 11: Marketing a product or service 15](#chapter-11-marketing-a-product-or-service) [What is entrepreneurial marketing? 15](#what-is-entrepreneurial-marketing) [Why have a marketing plan? 15](#why-have-a-marketing-plan) [Things to include 16](#things-to-include-2) [Overall marketing strategy 16](#overall-marketing-strategy) [Positioning strategy 16](#positioning-strategy) [Points of differentiation 16](#points-of-differentiation) [Pricing strategy 17](#pricing-strategy) [Promotions mix 18](#promotions-mix) [Distribution and sales 18](#distribution-and-sales) [Chapter 6a: product (or service) development plan 19](#chapter-6a-product-or-service-development-plan) [What is a product development plan? 19](#what-is-a-product-development-plan) [Why have a product development plan? 19](#why-have-a-product-development-plan) [Things to include 19](#things-to-include-3) [Development status and tasks 19](#development-status-and-tasks) [Challenges and risks 19](#challenges-and-risks) [Cost remaining 20](#cost-remaining) [Product (or service) development plan example 20](#product-or-service-development-plan-example) [Intellectual property 20](#intellectual-property) [Chapter 6b: developing effective business models 20](#chapter-6b-developing-effective-business-models) [What is an operations plan? 20](#what-is-an-operations-plan) [Why have an operations plan? 20](#why-have-an-operations-plan) [Things to include 20](#things-to-include-4) [Business location 21](#business-location) [Facilities and equipment 21](#facilities-and-equipment) [Operations model and procedures 21](#operations-model-and-procedures) [Operations strategy and plans 22](#operations-strategy-and-plans) [Chapter 9: Building a new venture team 23](#chapter-9-building-a-new-venture-team) [What is a new venture team? 23](#what-is-a-new-venture-team) [New venture team specifics 23](#new-venture-team-specifics) [Liability of newness 23](#liability-of-newness) [Building a skills profile 24](#building-a-skills-profile) [Board of advisors 24](#board-of-advisors) [Chapter 8: financial projections 24](#chapter-8-financial-projections) [What are financial statements? 24](#what-are-financial-statements) [Financial objectives 25](#financial-objectives) [Financial management 25](#financial-management) [Financial statements 26](#financial-statements) [Income statement 27](#income-statement) [Balance sheet 27](#balance-sheet) [Cash flow statement 28](#cash-flow-statement) [Ratio analysis 28](#ratio-analysis) [Break even analysis 28](#break-even-analysis) [Chapter 10: getting funding or financing 29](#chapter-10-getting-funding-or-financing) [The importance of getting funding or financing 29](#the-importance-of-getting-funding-or-financing) [Alternatives of raising money 29](#alternatives-of-raising-money) [Business angels 30](#business-angels) [Venture capitalists 30](#venture-capitalists) [IPO 30](#ipo) [Commercial banks 30](#commercial-banks) [Other sources of financing 31](#other-sources-of-financing) Chapter 1: Introduction to entrepreneurship =========================================== **Three primary reasons that people become involved in entrepreneurship** - Desire to be their own boss - Desire to pursue their own goals - Financial rewards A diagram of a business process Description automatically generated **Core characteristics of successful entrepreneurs** - Passion for the business - Product/ customer focus - Tenacity despite failure - Failure seen differently around the world - Western EU: failure is bad - Us: failure is expected and sometimes required **Secondary characteristics of successful entrepreneurs** - Prior industry experience - Helps to recognize and evaluate business opportunities - Prior entrepreneurial experience - Social networks - Higher education and creativity Chapter 2: Recognizing opportunities and generating ideas ========================================================= Three types of start-up businesses 1. **Salary-substitute firms**: firms that provide their owner a salary/ income similar to the one they could earn working a conventional job 2. **Lifestyle Firms**: firms that provide the opportunity for the owner to do what they love and make a living off it 3. **Entrepreneurial firms**: Firms that bring new products to the market (they tend to scale) **The window of opportunity** - Time period in which a business can realistically enter a market - At some point the market matures and becomes saturated with competitors, after which the window of opportunity closes **Idea versus opportunity** - An idea is a thought, an impression or a notion - Opportunities are ideas that have the quality of being attractive idea: coffee is bad, opportunity: replace machines by machine Y  Observing trends - Trends create opportunities - Most important trends are - Political action and regulatory change - Economic forces - Social forces technological advances Solving a problem - Sometimes it is enough to just notice a problem and solve it - Personal intuition or trends Gaps in the marketplace - When a product or service is needed by a specific group of people but doesn't represent a large enough market to be interesting to large manufacturers Chapter 3: feasibility analysis =============================== Before writing a business plan, do a feasibility analysis. - Determining whether a business opportunity is viable - Timing - Early in thinking through the prospects for a new business - Screen and evaluate business opportunities before a lot of resources are spent on them Product/ service feasibility ---------------------------- An assessment of the overall appeal of the product or service Two components - Product/ service desirability (basic appeal) - Product/ service demand ### Product/ service desirability - Is it a good time to introduce the product or service? Is the window of opportunity open? - Does the product or service make sense? Is it something consumers will get excited about? - Does it take advantage of an environmental trend? Does it solve a problem or take advantage of a gap in the marketplace? - Any fatal flaws? - Concept test - One-page description handed out to people for feedback (sense of viability) ### Product/ service demand 1. Buying intentions survey 2. Complement results with library, internet or gumshoe research Industry/ target market feasibility analysis -------------------------------------------- = an assessment of the overall attractiveness of the industry and the target market - **An industry** is a group of firms producing similar product or service in a similar way *(Vitell and Coca cola are not in the same industry because they would not be able to produce each other's products with the machinery)* - A business' target market is the limited portion of the industry it plans to go after Two components 1. Industry attractiveness (Porter's five forces!) 2. Target market attractiveness Organizational feasibility analysis ----------------------------------- Determine whether the entrepreneurs possess sufficient management expertise, organizational competences and resources. Focuses on non-financial resources only. Two components 1. Management prowess (determine ability of management team) - Passion and understanding of the market 2. Resource sufficiency - For example list the 6 to 12 most critical non-financial resources Financial feasibility analysis ------------------------------ Final component Preliminary financial assessment is sufficient **Three components** - Total start-up cash needed = a budget that lists all anticipated capital purchases and operating expenses needed to generate the first €1 in revenue (better to overestimate) - Financial performance of similar businesses - Overall financial attractiveness Chapter 4: writing a business plan ================================== Business plan = a written narrative that describes in detail what a new business intends to accomplish Dual-purpose document, used both inside and outside the business - Outside: investors and other external stakeholders - Inside: the business' employees (helps the employees operate in sync) Different audiences require different plans! Guidelines for writing a business plan -------------------------------------- - Structure Structure must be efficient, so people find the information they need very fast - Content Roadmap for the entrepreneurial process, long enough to provide sufficient information, yet short enough to maintain reader interest - Corridor principle Elements of the business plan may change, when new and unexpected opportunities arrive Afbeelding met tekst, schermopname, Lettertype, nummer Automatisch gegenereerde beschrijving Types of business plans -----------------------  Business plan outline --------------------- ### Section 1: executive summary - Short overview of entire business plan - Most important section of a business plan ### Section 2: Company description - General description of the company + one-sentence definition - Company history - Mission and vision - Products and services - Current status (how far is it developed - Legal status and ownership (founder's agreement?) ### Section 3: Industry analysis - Before target market - Promising areas and points of vulnerability of the industry - Industry definition - size, growth rate and projections - structure - Trends - Long-term prospects ### Section 4: Target market analysis - Segmentation of market + focus on your specific segment - The more a business knows about the target market, the better it can tailor its products and services to their needs - Industry segmentation - Target market selection - Target market size - Target market trends - Competitor analysis - Estimate of annual sales and market share ### Section 5: Marketing plan - How will the business market and sell its products or services - Overall marketing strategy - Positioning strategy - Points of differentiation - Pricing strategy - Cost-based pricing - Value-based pricing - Promotions mix - Distribution and sales ### Section 6: Management team and company structure - Typically consists of the founders and a handful of key management personnel - Management team and key personnel - Management team skills profile - Ownership structure and compensation - Board of advisors - Other professionals - Organizational chart ### Section 7: operations plan - Outlines in detail how the business will be run once it achieves full production - Backstage + frontstage (unseen vs seen by the customer) - Business location - Facilities and equipment - Operations model and procedures - Operations strategy and plans ### Section 8: product (or service) development plan - Focus on the status of development efforts of the business on its way to reaching full production - Use of milestones - Timeline - Risk mitigation plan - Development status and tasks - Challenges and risks - Cost remaining - Intellectual property ### Section 9: Financial projections - Pro forma financial projections - Basic logic of how profits are earned and how many units must be sold for it to break even - Sources and use of funds - Financial assumptions sheet - Pro forma income statements - Pro forma balance sheets - Pro forma cash flow statements - Ratio analysis - Break-even analysis Chapter 5 -- Part I: Analyzing the industry =========================================== What is an industry analysis ---------------------------- **Industry**: an industry is a group of businesses producing **a similar product or service**, such as airlines, fitness drinks or electronic games **in a similar way** **Industry analysis**: research that focuses on the attractiveness of the larger industry Why do an industry analysis --------------------------- - Early on in its creation process, it's **premature** for a new business to select a specific market - Describes how the **average business** in the industry is doing and what the **overall trends** are - Defines **playing field** and overall **rules** - **Point of reference** - Shows what is **realistically possible** Things to include ----------------- - Industry definition - Industry size, growth rate and sales projections - Industry characteristics - Industry structure - Nature of industry participants - Operating and financial industry ratios - Industry critical success factors - Industry trends - Environmental trends (PESTEL analysis) - Business trends - Industry long-term prospects ### Industry definition Briefly describe the business' industry in one sentence SIC-code NAICS-code NACE-code - Level 1: industry section (letter) - Level 2: industry departments (max. 2 numbers) - Level 3: industry groups (2+1 numbers) - Level 4: industry class (3+1 numbers) what we use ### Industry size, growth rate and sales projections Briefly discuss **size**, **growth rate** and future **sales projections** for the dominant industry the business will be entering (if multiple possible, pick most dominant) Rules of thumb - Display data in a multiyear format - Display information graphically - Provide Regional or local basis if possible - Report both positive and negative information ### Industry characteristics Four key characteristics 1. Industry structure - General industry attractiveness - Level of concentration or fragmentation 2. Nature industry participants 3. Operating and financial industry ratios 4. Industrial critical success factors (CSFs) **General industry attractiveness** 5 forces analysis - Helps determine average rate of return for industry - 8% - 30% of the variation in a business' profitability is directly attributable to the industry in which it competes - Always take the point of view of the incumbents Best industries for new businesses? - No good substitutes - Limited power of suppliers to negotiate input prices - Limited power of buyers to force selling price down - No cutthroat competition - High barriers to entry **Level of concentration or fragmentation** [Concentrated] industries are dominated by a few large companies [Fragmented] industries include many smaller companies **Nature of industry participants** Shed light on the nature and mixture of businesses in the industry - Who are the major players? What are their characteristics? - What market percentage do they have? - What competitive strategies do they apply? **Operating and financial industry ratios** Provides further insight into the structure and attractiveness of an industry, acts as point of reference. **Industry critical success factors (CSFs)** What does the industry have to be good at? Most industries have 6-10 CSFs, try excel in 2 or 3... Will be used to establish a competitor analysis grid and marketing plan ### Industry trends - Environmental trends (PESTEL analysis) - Most important: business economical trends - Profit margins in industry increasing or falling? - Innovation accelerating or falling? - Input costs going up or down? - New markets opening or existing markets being shut down? ### Industry long-term prospects Brief statement of beliefs regarding the long-term prospects for the industry No new information (summary) Chapter 5 -- Part II: Target market analysis ============================================ Target market analysis: analyze the specific segment that the business intends to tackle focus on price, promotion and distribution (place) (3 P's) Why do a target market analysis? -------------------------------- Focus on target market, its customers, its competitors, how it will compete in the marketplace and its potential sales and market share. *"Who are our customers and how will we appeal to them?"* Things to include ----------------- - Industry segmentation - Target market selection - Target market size - Target market trends - Competitor analysis - Direct competitors - Indirect competitors - Future competitors - Estimate of annual sales and market share ### Industry segmentation To determine the customers, the industry first needs to be segmented segmentation refers to the process of dividing the industry into distinct subsets or segments that behave in the same way or have similar needs (may recap some information already provided in the industry analysis but adds additional information) Rules that apply to a successful segmentation - **Homogeneity** of needs and wants within segments - **Heterogeneity** of needs and wants between segments - Segments should be distinct enough so that its members can be easily identified - Should be possible to determine the size of a segment - Segments should be large enough to be profitable Popular bases for segmentation - Geography (city, state, country) - Demographic variables (age, gender,...) - Product type - Psychographic variables (personality, lifestyle, values) - Behavioral variables (benefits sought, product usage rate,...) - Etc. ### Target market selection ° Once industry is segmented, select a preferred segment. ° Best to zero in one specific target segment at a time ° Big mistake is defining the target market to broad ### Target market size Involves the use of **secondary data** If secondary date doesn't exist, conducting primary research might be required. ### Target market trends The more a business understands its target market, the more it can finetune its products or services to its needs and wants First, investigate industry trends and then analyze specific market trends ### Competitor analysis Detailed analysis of a business' competition within a target market All companies have competitors, no matter what or how innovative their product or service is! Look at the three types of competitors competitive analysis grid **Competitive analysis grid** - First examine and understand the strategies and behaviors of its competitors - Information about competitors is referred to as competitive intelligence - Collect competitive intelligence in a professional and ethical manner - Purchase competitors' products - Study competitors' web sites - Read industry-related books, magazines and websites - Talk to customers of competitors -... - Next, competitive intelligence is used to see how the new business can stack up against its competition - STEP 1: identify the industry's and target market's **critical success factors (CSFs)** - At least 8 to 10 CSFs are identified - Some may be copied from the industry analysis - STEP 2: establish for each competitor a **factor score for each CSF** - Customer input required (survey, focus group,...)  ### Estimate of annual sales and market share Usually provided in the financial plan section - Before the business can plan its operations, marketing budget and the number of employees it will need, it needs to know how much sales It can anticipate No precise way to predict the number of sales and market share Always report underlying assumptions Chapter 11: Marketing a product or service ========================================== What is entrepreneurial marketing? ---------------------------------- New business' approach to market its products and services in broad terms Like a market analysis, a marketing plan adopts a stage-wise approach - First establish the business' overall marketing strategy, its position relative to rivals and its points of differentiation - Then explain how these aspects will be supported by its pricing, promotion, sales processes and distribution strategy Why have a marketing plan? -------------------------- Marketing plan emphasizes **how that business communicates to its customers** and **closes its sales** *"How will we convince our target market customers to buy our products or services instead of those of our competition?"* Things to include ----------------- - Overall marketing strategy - Positioning strategy - Points of differentiation - Pricing strategy - Cost-based pricing - Value-based pricing - Sales process - Promotions mix - Distribution sales ### Overall marketing strategy Marketing strategy sets the tone for many aspects of the new business Consistency is key - Should mirror how the company feels about its **target market** - Should be reflective to the new business' **mission, vision and objectives** - Impacts business development in a variety of ways (e.g. pricing, hiring, financial projections,...) How to make strategic choices? - Two generic strategies exist intended to strengthen a business' competitive position - Cost leadership - Produce similar product or service at a lower cost - Differentiation - Produce a "different" product or service that can extract a price premium - The key is to choose one dimension and execute it consistently ### Positioning strategy Once a target market has been selected a (new) business needs to select and conquer a competitive position in this market - Positioning = relative to its rivals - Create sustainable competitive advantages (SCA's) needs to be unique, not easy to imitate and organizationally well embedded ### Points of differentiation Establish a unique position in a customers' mind by consistently drawing attention to its points of difference (PODs) aspects of the product that make it different compared to other products focus on maximum 2 or 3 PODs Industry critical success factors Make a competitive analysis grid as a starting point ### Pricing strategy Price sends a clear message to consumers. It largely determines how much money a company can earn. number of sales is already determined in the market analysis Two methods - Cost-based pricing: Price is determined by adding a markup to a product's or service's cost - Value-based pricing: price is determined by estimating what consumers are willing to pay and then backing off a bit to provide a cushion  ### Promotions mix The specific tactics that a business uses to communicate with its target market. Two methods - Advertising: making people aware of a product or service in the hopes of persuading them to buy it - Public relations: efforts aimed at establishing a company's image with the public **Advertising** - Advantages - Raise customer awareness - Explain product's or service's comparative features and benefits - Create associations between a product or service and a certain lifestyle - Disadvantages - Low credibility - Possibility that a high percentage of people who see the add will not be interested - Message clutter - Relative costliness - Intrusiveness **Public relations** - Efforts to establish and maintain a positive business' image with the public - Self-serving - Helps with credibility - Most cost effective - Press releases, social media, blogging,... ### Distribution and sales All activities that move a business' products from its place of origin to the customer. - Direct sales - Catalogue sales - Internet sales - Intermediary -... Where do customers in my target market shop? And what are the most effective and economical ways to get the products some shelf space in those outlets Most important: intermediary or not? Chapter 6a: product (or service) development plan ================================================= What is a product development plan? ----------------------------------- Critical to businesses that are developing a completely new product or service. Journey towards full production. Why have a product development plan? ------------------------------------ A plan is needed to boost production and meet the financial projections. "How will the business be developed up to a point that it can handle mass production" Things to include ----------------- - Development status and tasks - Challenges and risks - Cost remaining - Intellectual property ### Development status and tasks A direct correlation exists between the perceived risk of the business and how far away the company is from selling the product or service in quantity. Usually done by adopting milestones such as: - Conception - Prototyping - Initial production - Testing - Full production Provide a timeline describing the remaining tasks in the development of the product or service ### Challenges and risks Investors anticipate that challenges and risks inherently exist and will want to know what they are show evidence that you are aware of the risks and challenges Disclose design and development challenges and risks - Discuss how those will be avoided - Discuss how they will be mitigated - Discuss their impact ### Cost remaining Estimate the budget for the remaining design and development work. ### Product (or service) development plan example ### Intellectual property Trademarks, patents, trade secrets,... Chapter 6b: developing effective business models ================================================ What is an operations plan? --------------------------- Concise description of how exactly a business will produce its product or service in large quantities. Why have an operations plan? ---------------------------- While the marketing plan is about attracting customers, the operations plan is about serving them. what will the business look like once it achieves mass production? Things to include ----------------- - Business location - Facilities and equipment - Operations model and procedures - Operations strategy and plans ### Business location Sometimes important, sometimes not. Reasons for the business' location to become critical - Proximity to a qualified labor force - Closeness to suppliers - Access to transportation - Proximity to customers -... ### Facilities and equipment Focus on critical production facility the business must have access to in order to achieve its desired sustainable competitive advantages (SCAs) In case parts of production are outsourced, business partners become important. - How are they identified and selected? - How will they be held accountable for the quality of their output? -... If further growth is an objective, also consider how the facilities and equipment will evolve over time. ### Operations model and procedures Cover the major building blocks. Methods - Separation between backstage and frontstage - Operations flow diagram - Business model canvas All closely related to the value chain and value chain analysis (VCA) Important details - How will inventory be stored and how often turned over? - Length and nature of business' production cycle - Bottlenecks? - After-sale service? - Seasonal production loads - Quality control? -... - Operations flow diagram - Detailed visual representation of the activities performed inside and outside the company - Sometimes difficult to interpret  - Business model canvas - Diagram illustrating how the business competes, uses its resources, structures its relationships, interfaces with customers and creates value - Focus on how all these elements fit together - No standard business model - Over time the most successful business models predominate ### Operations strategy and plans Businesses choose a strategy and then need to configure internal operations to support that strategic choice. - Must have right **organizational structure** in place for chosen strategy - Value creation activities can be divided in primary and support activities - Primary activities: directly associated with development, production and distribution of goods and services - Support activities: assist the accomplishment of primary activities - Company's operation can be thought of as a chain composed of a **series of distinct value creation activities** Value chain analysis ascertain a business' **weaknesses and strengths** on an activity-by-activity basis, **relative to its rivals** - Each activity requires several resources and capabilities - No business is likely to have enough resources and capabilities to be good at all activities Does a business have resources and capabilities to perform a particular activity **in a superior way**? - Better than its competitors? (benchmarking) - If the outcome is unsatisfactory, the activity could be outsourced based on a two-stage decision model do we really need to perform an activity in-house? - Is the activity **industry-specific**? - Is the activity proprietary (**firm-specific**)? 2x yes: perform activity in-house Outsourcing is not offshoring! Offshoring = international outsourcing Chapter 9: Building a new venture team ====================================== What is a new venture team? --------------------------- A group of **founders, key employees and advisors** that move a new venture from an idea to a fully functioning business. - Doesn't come together all at once - Is built as the business can afford to hire additional personnel Involves more than paid employees many businesses have boards of advisors and professionals on whom they rely for direction and advice New venture team specifics -------------------------- Size of founding team - More than half of all new businesses are started by multiple individuals Heterogeneous or homogeneous founding team - **Heterogeneity** adds to the team's combined experiences and competences which in turn triggers innovativeness and creativity - **Homogeneity** fosters new venture performance through improved communication, behavioral integration, the establishment of trust between team members and a decrease in team conflict Ventures started by a team advantage over individual? - Teams bring more talent, resources and ideas - Teams possess broader and deeper networks - Cofounders offer each other psychological support - Team members may not get along - If founders have similar areas of expertise, they duplicate rather than complement one another - Members can easily disagree in terms of work habits, tolerances for risk, levels of passion and ideas on how the business should be run Liability of newness -------------------- New businesses have a high propensity to fail - This high failure rate is due in part to their liabilities of newness, which refers to the fact that these businesses lack a track record of success Assembling a talented and experienced management team is one path that new businesses can take to overcome this liability - Building a skills profile is a good technique to investigate where additional experience/ knowledge is required Building a skills profile ------------------------- - A chart that depicts the most important skills or competencies that are needed and where gaps exist - On top of building the chart, the founding team should think about how to deal with the current skills gaps Board of advisors ----------------- A panel of experts who are asked by a business to provide counsel and advice on an ongoing basis - Possesses no legal responsibility and gives nonbinding advice - Can be established for general purposes or can be set up to address a specific issue Primary functions of the board - Provide guidance - Lend legitimacy - Well-known and respected board members bring instant credibility to a new business Chapter 8: financial projections ================================ What are financial statements? ------------------------------ Written reports that quantitatively describe a business' financial health - Used to assess whether the financial objectives are being met Two types - **Historical** financial statements: reflect past performance and prepared on a quarterly or annual basis - **Pro forma** financial statements: projections for future periods based on forecasts, strictly planning tools, recommended to adopt 3 to 5 years of statements Financial objectives -------------------- Afbeelding met tekst, Lettertype, schermopname, visitekaartje Automatisch gegenereerde beschrijving Profitability: - The ability to earn a profit - Many new businesses are not profitable during their first one to three years while they are developing activities, training employees and building their brands Liquidity: - The ability to meet short-term financial obligations - Even if a business is profitable, it is often a challenge to keep enough money available to meet routine financial obligations Efficiency: - How productively a business utilizes its assets relative to its revenue and profits - Not necessarily expressed in financial terms Stability: - The strength and vigor of a business' overall financial posture - For a business to be financially stable, it must not only earn a profit and maintain good liquidity but also keeps its debt in check Financial management -------------------- Deals with two things - Raising money - Managing a company's finances in such a way that it achieves the highest rate of return Important questions - Will the business make or lose money? - How much cash does the business need to have available? - How efficiently is the business utilizing its assets? - Where will the needed funds come from? - Overall, is the business in good shape financially? Financial statements --------------------  **Sources and use of funds statement** - Document that lays out specifically - How much money the business needs - Where the money is coming from - What the money will be used for - These items traditionally become the initial assets and liabilities of the business **Financial assumptions sheet** - A collection of the most critical assumptions that the projected financial statements are based on - Some assumptions will be based on general information no specific sources needed - Other will be based on rather specific information sources should be cited - Financial assumption sheet is likely to refer to prior sections of this course - Positive, negative and neutral assumptions can be included **Preparation of forecast** - Forecasts are predictions of a business' future sales, expenses, income and capital expenditures - New businesses typically base their forecasts on - Industry averages - Experiences of similar start-ups - Estimates of sales Estimates of sales - Projection of a business' sales for a specific period - First forecast developed - Basis for most of the financial statements Once a business has completed its estimates of sales, it must forecast its cost of sales or cost of goods sold - Most common way: percentage-of-sales method Income statement ---------------- - Reflects the projected results for a business for a specific period - Shows whether the business will be making a profit or be experiencing a loss - Often referred to as the "profit and loss" statement - No indication of a business' cash position Three numbers that receive the most attention - Net sales - Consist of total sales minus allowances for returned goods and discounts - Custom to adopt different scenarios - Cost of goods sold - All direct costs associated with production - Operating expenses - Including marketing, utilities and administrative costs not directly related to production Balance sheet ------------- - Unlike income statement, which covers a specific period, the balance sheet is a projection of a business' assets, liabilities and owners' equity at a specific point in time (snapshot) - Must always balance - Left: assets, right liabilities Most new businesses create a projected opening a balance sheet that shows what the business will look like at the beginning Important numbers - Current assets - Cash plus items that are readily convertible to cash - Also includes items such as accounts receivable and inventory - Fixed assets - Assets used over a longer time frame, such as real estate, buildings, equipment and furniture - Current liabilities - Obligations that are payable within a year - Long-term liabilities - Notes or loans that are repayable beyond one year - Owners' equity - The equity invested in the business by its owners plus the accumulated earnings Cash flow statement ------------------- - The most valuable of the financial statements - Indication of whether a business can maintain sufficient cash Three activities - Operating activities - Investing activities - Finance activities Ratio analysis -------------- - The most practical way to interpret or make sense of a business' financial statements is through financial ratios - Should be compared to industry norms Three most common categories - Profitability ratios (income against resources used) - Liquidity ratios (short term assets vs short term liabilities) - Overall financial stability Break even analysis ------------------- Determine the volume of sales a business must do to "break even" in terms of its profit and loss Allow to evaluate the potential different strategies Total fixed costs / (price -- average variable costs) Chapter 10: getting funding or financing ======================================== The importance of getting funding or financing ---------------------------------------------- Many entrepreneurs go about the task of raising capital haphazardly because they lack experience in this area Why most new businesses need external funding Afbeelding met tekst, Lettertype, schermopname Automatisch gegenereerde beschrijving Alternatives of raising money ----------------------------- Personal financing - Personal funds - Most founders contribute persona funds - Sweat equity - MUST DO - Friends and family (and fools xd) - Bootstrapping - Finding ways to avoid the need for external financing or funding - Examples:  Afbeelding met tekst, schermopname, Lettertype, Rechthoek Automatisch gegenereerde beschrijving Equity capital - Exchanging partial ownership in a business, usually in the form of stock or equity, for funding Debt financing - Getting a loan Business angels --------------- Individuals who invest their personal capital directly into businesses Mostly between €10.000 and €200.000 Venture capitalists ------------------- - Limited partnerships of money managers who raise money in funds to invest in start-ups - Fund very few entrepreneurial initiatives - Looking for a home run - Due diligence process - Invest money in stages - Pay attention to the business closely IPO --- Initial public offering first sale of stock to the public Milestone for a business Motivations - Raise equity capital to fund current and future operations - Increase a business' public profile - Liquidity event for investors to recoup their money - Use as a form of currency Commercial banks ---------------- Banks are risk averse not seen as major funding source Other sources of financing -------------------------- - Peer-to-peer lending - Crowdfunding - Private grants and government grants - Strategic partnerships - Leasing - Written agreement - Assets with very little or no initial down payment - Buy option